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Dillard's (DDS) Picks Pace on Q2 Results: Will the Trend Stay?

Zacks Equity Research
·4 min read

Dillard’s Inc. DDS stock has been experiencing a bounce back after significant decline witnessed in the past few months, since reporting narrower-than-expected losses in second-quarter fiscal 2020. The company is among the retailers that have been benefiting from the reopening of nearly all its stores following the unlock guidance issued by the governments. Notably, the company reopened all its stores, except one, as of Jun 2, 2020.

Moreover, the stores that were reopened have witnessed improved sales trends, generating about 72% of the prior-year quarter’s sales between Jun 2 and Aug 1.

This not only led to narrower-than-expected losses for the company in the fiscal second quarter, but also boosted stock performance. Notably, shares of the company have lost 7.1% in the past three months compared with the industry’s decline of 15.1%. Nonetheless, this Zacks Rank #3 (Hold) stock reflects  robust growth of 20.9% since reporting second-quarter fiscal 2020 results on Aug 12.

Other Factors Driving Growth

In addition to the reopening of stores, one key factor that has been aiding Dillard’s is focus on inventory management and cost reduction, citing the extended store closures and business disruptions. The company has taken several steps to reduce costs starting from the fiscal first-quarter, which also continued in the second quarter. Some of these are extension of vendor-payment terms; cancellation, suspension and delaying of shipments; merchandise-purchases reduction; reduction of discretionary and capital expenditures, and payroll reduction.

Additionally, it adopted aggressive measures to lower excess inventory, driven by the reduced demand in fiscal second quarter due to the coronavirus pandemic and government-enforced store closures. Consequently, it continued to significantly reduce total merchandise purchases, resulting in a decline of 62% in fiscal second quarter. This also helped the company end fiscal second quarter with inventory down 20% year over year. The reasonable ending inventory bodes well for the fiscal third quarter.

Moreover, inventory reductions resulted in lower markdowns during fiscal second quarter, which boosted the gross margin. Notably, retail gross margin improved 239 basis points (bps) compared with the year-ago quarter primarily due to lower markdowns. On a consolidated basis, gross margin expanded 271 bps year over year to 67.7%.

Dillard's retail SG&A expenses declined 34.8% year over year to $265.8 million in fiscal second quarter. As a percentage of sales, however, retail SG&A expenses rose 20 bps. Moreover, consolidated operating expenses of $267.1 million declined 34.7% year over year, owing to a 41% decline in payroll expenses during the quarter, as well as significant cost savings realized in all expense categories. Meanwhile, as a percentage of sales, it deleveraged 40 bps to 29.1%. Additionally, payroll expense declined 38% in the first half of fiscal 2020 mainly due to employee furloughs owing to the pandemic-related store closures.

Sales Trends Remain Sluggish

Although the company managed to put up a good show in fiscal second quarter, its top line reflected a significant decline. Net sales plunged nearly 35.6% year over year, while retail sales were down 35.2%. The top line was impacted by the closure of a considerable number of its stores at the beginning of the quarter and generally slow retail traffic owing to the pandemic.

Moreover, the company did not report comparable-store sales (comps) data for the reported quarter as most of its brick-and-mortar stores remained closed due to the coronavirus pandemic, and in-store and online sales are interdependent. Looking at fiscal 2020, the company expects to witness a net operating loss.

Better-Ranked Stocks to Consider

Target Corporation TGT has a long-term earnings growth rate of 7.2% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Big Lots, Inc. BIG has a long-term earnings growth rate of 7.1%. The company presently carries a Zacks Rank #2 (Buy).

Tapestry, Inc. TPR has a long-term earnings growth rate of 10% and it currently has a Zacks Rank #2.

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